Business Combination Business Combinations (Notes)

9 Months Ended

Sep. 30, 2017

Business Combinations [Abstract]

Business Combination Disclosure [Text Block]

BUSINESS COMBINATION

Delaware Basin Acquisition. On December 6, 2016, we closed on an acquisition which was accounted for as a business combination. The acquisition consisted of the purchase of stock of an entity and assets of other entities under common control. The transaction was for the purchase of approximately 57,900 net acres, approximately 30 completed and producing wells and related midstream infrastructure in Reeves and Culberson Counties, Texas, for an aggregate consideration to the sellers of approximately $1.64 billion, after preliminary post-closing adjustments. The total consideration to sellers was comprised of approximately $946.0 million in cash, including the payment of $40.0 million of debt of the sellers at closing and other purchase price adjustments, and 9.4 million shares of our common stock valued at approximately $690.7 million at the time the acquisition closed. The purchase accounting for the entity of which we acquired the stock reflected oil and gas assets that did not receive fair value step-up of the tax basis. As a result, a significant deferred income tax liability was calculated based on the acquired allocated fair value of the assets in excess of the tax basis of assets inside the entity. This calculation resulted in approximately $375.0 million of non-cash basis needing to be allocated to the acquired assets. No deferred tax liability was established for the calculated goodwill as the goodwill did not qualify as tax goodwill.

The final fair value allocation of the assets acquired and liabilities assumed in the acquisition are presented below and include customary post-closing adjustments. The most significant item to be completed during the final purchase price allocation in the third quarter of 2017 was the final allocation of value to the unproved oil and gas properties associated with the acquired acreage. Adjustments to the preliminary purchase price primarily stem from additional information we obtained about facts and circumstances that existed at the acquisition date that impact the underlying value of certain assets acquired and liabilities assumed, including detailed lease terms, location of the acreage, and intent to develop the acreage as of the date of closing. There were a significant number of leases acquired with complex lease terms and evaluation of these terms and the timing of the lease expirations impacted the manner in which the final purchase price was allocated. Our final determination of the value of goodwill has been adjusted for all post-closing adjustments.

The details of the final purchase price and the allocation of the purchase price for the transaction, are presented below (in thousands):

	September 30, 2017
Acquisition costs:
Cash, net of cash acquired	$	905,962
Retirement of seller's debt	40,000
Total cash consideration	945,962
Common stock, 9.4 million shares	690,702
Other purchase price adjustments	426
Total acquisition costs	$	1,637,090
Recognized amounts of identifiable assets acquired and liabilities assumed:
Assets acquired:
Current assets	$	6,401
Crude oil and natural gas properties - proved	216,000
Crude oil and natural gas properties - unproved	1,697,000
Infrastructure, pipeline, and other	33,153
Construction in progress	12,323
Goodwill	75,121
Total assets acquired	2,039,998
Liabilities assumed:
Current liabilities	(24,496		)
Asset retirement obligations	(3,705		)
Deferred tax liabilities, net	(374,707		)
Total liabilities assumed	(402,908		)
Total identifiable net assets acquired	$	1,637,090

The fair value measurements of assets acquired and liabilities assumed are based on inputs that are not observable in the market, and therefore represent Level 3 inputs. The fair values of crude oil and natural gas properties and asset retirement obligations were measured using valuation techniques that convert future cash flows to a single discounted amount. Significant inputs to the valuation of crude oil and natural gas properties include estimates of reserves, future operating and development costs, future commodity prices, estimated future cash flows, lease terms and expirations, and a market-based weighted-average cost of capital rate. Within the unproven properties, the allocation of the value to the underlying leases also required significant judgment and was based on a combination of comparable market transactions, the term and conditions associated with the individual leases, our ability and intent to develop specific leases, and our initial assessment of the underlying relative value of the leases given our knowledge of the geology at the time of closing. These inputs require significant judgments and estimates by management at the time of the valuation and were the most sensitive and subject to change.

This acquisition was accounted for under the acquisition method. Accordingly, we conducted assessments of net assets acquired and recognized amounts for identifiable assets acquired and liabilities assumed at their estimated acquisition date fair values, while transaction and integration costs associated with the acquisition were expensed as incurred.

Goodwill. Goodwill was calculated as the excess of the purchase price over the fair value of net assets acquired, including the additional value resulting from the creation of the deferred tax liability, and represents the future economic benefits arising from other assets acquired that could not be individually identified and separately recognized. Among the factors that contributed to a purchase price in excess of the fair value of the net tangible and intangible assets acquired were the acquisition of an element of a workforce and the expected value from operations of the Delaware Basin acquisition to be derived in the future, such as production from future development of additional producing zones. The amount of the final goodwill that was recorded in the third quarter of 2017 related to the Delaware Basin acquisition was $75.1 million and was higher than the initial estimated amount recorded as of December 31, 2016, primarily related to finalization of the aggregate acreage position acquired and the related lease terms and a final settlement with the sellers in connection with a revised valuation of certain acquired leases and the retirement of estimated environmental remediation liabilities. Any value assigned to goodwill was not expected to be deductible for income tax purposes.

The following table presents the changes in goodwill from the preliminary allocation at December 31, 2016, and the final allocation determined during the quarter ended September 30, 2017:

	Amount
	(in thousands)
Preliminary purchase price allocation	$	62,041
Adjustments	13,080
Final purchase price allocation	$	75,121

See the footnote titled Goodwill for the details regarding the impairment of goodwill as of September 30, 2017.